#2. Representative Bias

Losses hurt.

Losing sucks.

To offset this painful experience and feeling, it’s common to be optimistic about a stock before buying it. The problem is that optimism can get you into trouble.

The next Microsoft, the next Apple and the next Google is what most investors look for. News and information about such optimistic companies is all over the place and makes the information easily accessible and available.

When it comes to explaining problems and teaching, using similarities and analogies work wonders. But not for investing.

When headlines scream things like “Facebook is the new Google”, it’s called representative bias. A bias where you assume that something similar will have similar outcomes.

And so, investors hold onto a stock hoping for the 10,000% lotto jackpot instead of knowing when to sell.

#3. Availability Bias and the Illusion of Knowledge

The internet has polluted the availability of information.

Everyone is a market expert.

There is just too much information that even the bad info sounds correct. Because it is so easy to accumulate and hoard information, investors can be swayed to make decisions on what information is available and not on what is important.

All this information also causes the illusion of knowledge.

More information means more knowledge and therefore leads to better decisions. Right?

Nope.

More information can make you feel confident and not just financially invested, but psychologically invested which makes the whole stock selling decision harder.

When Faced With a Stock Selling Decision Here are the Dos and Don’ts You Need to Follow

Here is a list of tips I have adapted from a Schwab magazine titled On Investing.

Develop a strategy that clearly identifies the characteristics of stocks you will purchase. You can use the OSV Stock Analyzer. This awesome valuation tool will help you make objective and consistent decisions.

Avoid “story stocks” and do not listen to stock tips from unproven sources. Check out the Warren Buffett Quotes. I know you get sick of hearing it, but remember to do your own studies.

Keep a journal of the reasons why you like to own a stock and what will make you sell. When I’m writing things down in my notebook, my brain seems to remember better and analyze faster. When you write down your answers, you may realize that you really don’t have a reason to buy it in the first place.

Don’t check your portfolio so often. Easy to say but difficult to do. So much information everywhere. Even if you don’t want to check, you’ll be blasted with what the market is doing everywhere you go. Worth a try though.

Create a sell rule and stick to it. Regularly evaluate each stock against your predefined sell rule. If it violates your rule, sell it regardless of current or purchase price.

Don’t sell based on price. “Price is what you pay, value is what you get”. Use price to your advantage, not as an indicator of the company fundamentals.

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